Results 

Genting  Singapore’s  (GenS)  9MFY14  core  PATAMI  of SG$447.5m  came  in  below  ours  and  consensus’  estimates, accounting for  only 59.1% and 66.7% of full year earnings.

Deviations

Weaker-than-expected  hold rate of below  2% in 3QFY14.

Highlights 

GenS’  9MFY14  topline  was  up  by  3.3%  from  improved volume  in  VIP  segment  (0.2%)  as  well  as  higher  average hold  rate  (9MFY14:  2.6%;  9MFY13:  2.5%),  albeit  still below theoretical 2.8%.

Mass  market  volume  continues  to  grow,  accounting for 55% of  GenS’  overall  gross  gaming  revenue  (GGR)  in  3QFY14. In totality, mass market revenue  grew 3.8% yoy for 9MFY14.

Non-gaming  revenue  remained  flattish  as  marine  life  park’s (MLP)  novelty  effect  wears  off.  However,  we  remained optimistic  about  the  business   segment  as  we  understand there  will  be  more  attractions  going  forward  as  well  as  the return  of USS’ Battlestar Galactica ride.

GenS’  hotel  development  in  Jurong  is  on  schedule  and  is scheduled  for  soft-opening  by  May  2015  and  fully  open  by June  /  July 2015. The new hotel would add an additional 550 rooms  to  GenS’  hotel  room  inventory  (+35.8%). Management is excited about the new hotel as it would allow more  room  for  growth  to  GenS’  gaming  and  non-gaming business segments.

Despite  the  negative  media  reports  on  GenS’ venture in Jeju over  the  last  2-3  months,  things  have  now  turned  around with  positive  opinion  by  the  Governor  of  Jeju.  The  group have  resubmitted  the  planning  of  the  integrated  resort  (IR) after  scaling  down  the  entire  development  by  circa  20%, increasing  the  size  of  facility  offerings  as  well  as  disclosing the  size  of  the  casino  to  be  built.  Management  is  confident and expects to release some announcement  by 1HFY15.

In  Japan,  management  highlighted  that  the  gaming  bill  is likely  to  be  passed  only   in  the  next  session  (Jan-June/July 2015).  Should  the  bill  be  passed  by  1HFY15,  the  proposed IR  could  still  be completed in time for the 2020 Olympics as the development  period  would  take circa 4 years.

Risks

1)  Regulatory  risk;  2)  Further  decline  in  RWS’  market share to  MBS;  3)  Weaker-than-expected  hold  percentage  in  the VIP  segment;  4)  Worsening  in  economic  condition;  and  5) Failure in casino license renewal.

Forecasts

• We  tweaked  our  #p#Forecasts downwards  to  reflect  lower  hold rate  for  FY14.  Hold  rate  for  FY15-16 remained unchanged at 2.8% (theoretical rate). As such, FY14-16 EPS is reduced by 24.7%, 5.0% and 9.8%, respectively.

Rating

BUY

Positives   –  (1)  Duopoly  industry;  and  (2)  Lower  tax  rates compared  to regional  peers.

Negatives   –  (1)  Highly  regulated  industry;  and  (2)  Earnings from  gaming  operations  are  highly dependable on luck factor and hold rates.

Valuation

• Post-revision,  target  price  is  subsequently  reduced  to SG$1.49  (previously  SG$1.54)  based  on  unchanged  FY15 EV/EBITDA multiple of 9.5x. Maintain  BUY.

Source: Hong Leong Investment Bank Research - 12 Nov 2014